By Nell Henderson
Washington Post Staff Writer
Friday, December 16, 2005

Consumer prices plunged last month at the steepest rate in 56 years because of sharp declines in oil and gasoline prices, the government reported yesterday, adding to other signs that the national economy has largely rebounded from the effects of the recent hurricanes.

The consumer price index, a widely followed measure of inflation, fell 0.6 percent in November -- the largest drop since July 1949 -- primarily because of an 8 percent drop in energy costs, the Labor Department said.

Energy prices soared after hurricanes Katrina and Rita disrupted oil production and refining in the Gulf of Mexico. Prices eased as drilling rigs, refineries and pipelines were gradually repaired.

However, consumers paid more last month for many other items, including housing, clothing, medical care, hotel rooms, food, electricity and natural gas. Those price increases helped push the "core" CPI, which excludes energy and food costs, up 0.2 percent.

Some of those price increases probably reflect efforts by hotels, retailers and other businesses to cover their higher energy costs, analysts said.

"High petroleum prices continue to pass through to the general price level," said Eugenio Aleman, senior economist at Wells Fargo Economics. "There is potential for prices to continue to increase in the future."

Even though energy prices fell last month, they had been rising steadily before the hurricanes and were still 18.3 percent higher last month than they were in November of last year, the department reported.

The average price of regular gasoline, for example, was $2.19 a gallon yesterday, according to the AAA auto club. That was far below the peak price of $3.06 a gallon on Labor Day but is still up from $1.83 a year ago.

The CPI rose 3.5 percent over the 12 months that ended in November, the Labor Department said.

"The overall cost of living has risen quite significantly over the year," said Bernard Baumohl, executive director of the Economic Outlook Group LLC, an economic consulting firm.

The CPI report is likely to reinforce the Federal Reserve's view that high energy prices and strong economic growth may add to inflation pressures in coming months. Fed officials expressed that concern Tuesday when they raised their benchmark short-term interest rate and indicated that they are likely to do so again next month to keep inflation under control.

Fed policymakers are watching closely to see how successful businesses are at passing energy costs on to consumers and think that may become easier next year if the economy continues to grow briskly.

Job growth revived last month after stalling in September and October because of the hurricanes. Consumer confidence has bounced back as gasoline prices have ebbed, and retailers have reported a healthy start to the holiday shopping season. Fed officials also expect economic growth to be stimulated in the months ahead as rebuilding continues in the Gulf Coast region.

The nation's factories, mines and utilities boosted their combined production by 0.7 percent in October, the Fed said in a separate report. Part of that gain reflected restored oil production in the hurricane-affected areas.

Businesses also used more of their production capacity in October, pushing the usage rate to 80.2 percent, the Fed reported. Some economists think a rate of 80 percent or above can result in bottlenecks that push prices up.

"Higher levels of utilization, as noted in the most recent [Fed] statement, will tend to put a little more upward pressure on inflation in the months ahead," economists at Goldman Sachs U.S. Economics Research wrote in an analysis for clients.

Most workers' wages rose faster than inflation last month but have fallen over the past year after adjusting for price changes, the Labor Department reported in another report.

Average weekly earnings for most workers rose 0.6 percent in November from the month before, after adjusting for inflation, the department said.

But those wages bought 0.4 percent less last month than a year earlier, after adjusting for inflation.

Moreover, average weekly wages were slightly lower last month, after adjusting for inflation, than they were four years earlier, in November 2001, when the last recession ended, said Jared Bernstein, senior economist at the Economic Policy Institute, a think tank that focuses on labor issues.